Has the spending slowdown arrived? (Jan 08)

Even aggressive price discounting is not tempting consumers to part with their cash. Interpreting sales figures at this time of year should be done with caution, due to problems with seasonal adjustment and the chance that retail sales rebound as the January “sales” continue. Nonetheless, there is a strong chance that things get worse from here. The crucial support to spending last year - the housing market – is weakening. And although December’s interest rate cut might boost confidence, not all lenders have passed it on. We expect real spending growth to slow from over 3% in 2007 to 2% this year and 1.5% in 2009. But following the recent equity price falls and the new round of utility price rises, there is a growing risk that spending weakens more sharply. Accordingly, retailers are facing the prospect of a double squeeze on margins from slowing sales volumes and weakening pricing power.